Incentive hangover must be dealt with

Since the 2008 financial crisis, dealers have made efforts to boost sales with low interest rate financing and cash back incentives. The allure may be too hard to resist for new car buyers.

Kevork Djansezian, Getty Images

Know when to quit

by
David Booth, Postmedia News | August 6, 2009

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Let me be the first to admit I possess neither the mental acuity of a Milton Friedman nor the audacity of a John Kenneth Galbraith. But, assuming that my simplistic, reductive mind has this economic crisis sussed, my understanding is that we got into this terrible financial mess because we spent money we didn’t have on things we couldn’t afford.

And, if I’m reading right the economic sections of this and other fine newspapers, the cure for this greatest of recessions has been to spend more money we don’t have on things we still can’t afford. While I know enough history to understand that the Great Depression was exacerbated by governments’ inaction on the fiscal front, the notion of spending a bunch of money to end a crisis caused by spending too much money reminds me of the famed Vietnam-era protest that “fighting for peace is like f— for virginity.”

Hence, my skepticism on the orgy of “incentives” that are being touted around the globe. Oh, they’re all dressed up in fine “environmental” and “stimulus” togs, but no matter who is paying for them and why they are being offered, they smack of the forward selling that got Detroit’s Big Three in such a pickle.

“Cash on the hood” has long been used to lure consumers, but the outright bribery really took off in the mid-1980s when overproduction caused General Motors to have almost a million unsold cars that needed to find homes.

The allure of low interest rates and cash back proved so addictive that Detroit never managed to wean itself off. Indeed, so pervasive are these payouts to consumers that some slow-selling models in recent months needed upward of US$10,000 in incentives to attract customers.

That Ontario Premier Dalton McGuinty is offering up to $10,000 to buyers of plug-in hybrids for the laudable goal of making “it easier to buy green cars” does not alter the fact the new program is a bald-faced scheme for consumers to buy cars they would not otherwise purchase.

Indeed, is the Ontario government’s program to buy Chevrolet’s seemingly overpriced Volt that much different from GM’s own programs to buy its slow-selling SUVs?

Though the goal is much different, the McGuinty government is essentially admitting that Ontarians will not drive the electric vehicles being touted as the environment’s saviour unless they are bribed to do so.

The same applies for the call for a more aggressive “cash for clunkers” program here in Canada. Again, it’s a laudable goal that even I admire. Indeed, its goal is far more practical than McGuinty’s ill-conceived plug-in promotion; the quickest road to emissions and fuel economy salvation is not with electric cars but getting all those aged toxin- spewing, gas-guzzling dinosaurs off the road.

Nonetheless, there are pitfalls, even beyond the problem of “pulling forward” sales and damping future demand. In Germany, where a program of a §2,500 refund for old cars has proven wildly successful, manufacturers of luxury marques have complained it unfairly promotes their lesser competition.

Closer to home, the Harper government’s ill-conceived ecoAUTO program caused all manner of controversy, especially with Honda, when the company’s Fit subcompact missed the program’s target for a $1,000 rebate by just 0.1 litres per 100 kilometres.

In the United States, where the government recently boldly proclaimed its US$4,500 Car Allowance Rebate System (CARS) to turn in old gas guzzlers, the program has also been hugely successful. It may be unnecessarily complex, but it has been effective in boosting the moribund American car market and getting gas guzzlers off the road (nine of the 10 most frequently traded-in vehicles are full-sized trucks or SUVS).

But the biggest problem with any incentive program is knowing when to quit before the addiction gets out of hand. Already the CARS program has committed the US$950-million that was supposed to last through November. Now, the US$2-billion additional funding being approved might last until Labour Day.

Like taxes, incentive programs — once implemented — are extremely difficult to rescind without negative consequences. Just as governments get used to rolling in our hard-earned cash, consumers may simply stop buying cars again when not offered huge, honking rebates.

The secret to a successful incentive program, then, is much the same as the alcohol-sodden keggers we all (OK, maybe just me) attended at college. It’s quite all right to party hardy all weekend, but come Monday morning, one has to have the discipline to emerge from the stupor — and, of course, deal with the inevitable hangover.